FEATURE: ESTATE PLANNING & TAXATION

By Benjamin N. Feder & Rebecca A. Levin

A Modern Look at the Enforceability of No-Contest Provisions

State courts and legislatures have taken various approaches

our client, Anna, is updating her estate plan in practitioners often employ an “in terrorem clause,” light of the recent passing of her husband. She otherwise known as a “no-contest” clause. A no-con- Yhas two adult children, Sarah and David. Sarah test clause provides that any beneficiary who contests has a son, Michael, and David has a daughter, Kate. a will or trust shall forfeit some or all of his interest Anna wishes to leave her estate of $4 million to them. under the applicable will or trust. A no-contest provi- Over the last few years, Anna has become more sion is meant to deter a beneficiary from contesting a dependent on her daughter, Sarah. Sarah has been will or trust (or corresponding accounting). Below is tremendously helpful to her by driving her to doctors’ an example of a somewhat standard no-contest provi- appointments, doing her shopping and helping her sion (alternatives to follow below): to maintain her home. To show her gratitude, Anna would like to leave Sarah more than David. She would No Contest. If any person beneficially interested like to leave $2.5 million to Sarah, $1 million to David in this Agreement shall enter into an agreement and $250,000 to each grandchild for their education. to, commence or, except as required by law, However, she’s worried about how David will react participate in any proceedings to: (a) contest the when he learns Sarah is receiving more than him. validity of this Agreement or any part thereof, David has expressed concern that Sarah can be con- (b) contest the validity of any other trust of which trolling and demanding. I am a grantor or any part thereof, (c) contest the He’s also insinuated that Anna’s memory is worsen- validity of my will or any part thereof, (d) assert ing. Anna fears that when David learns Sarah is getting any claim based on an alleged agreement to make more than him, he may pursue litigation to invalidate a will or trust agreement or otherwise dispose Anna’s estate plan claiming Sarah unduly influenced of my estate or any part thereof, or (e) request Anna or that Anna didn’t have capacity when she an accounting for any period prior to my death, made the changes. Anna strongly believes that with all said beneficiary shall forfeit whatever interest he of Sarah’s help, she should receive more money than would have taken under this Agreement and the David. Anna also doesn’t want the estate to be involved Agreement shall be administered and distributed in costly, protracted litigation. as though such beneficiary had predeceased me. No-Contest Provisions State Law Approaches In the above example, Anna is concerned David will State courts and legislatures have taken varying contest the validity of the trust. In situations like these, approaches when it comes to enforcing no-contest provisions. Florida expressly prohibits the enforcement of no-contest clauses,1 while most states will enforce Benjamin N. Feder is a no-contest provisions on a limited basis. No-contest partner, and Rebecca A. provisions are presumptively valid in a will or trust in Levin is an associate, both Illinois.2 In determining the enforceability of no-con- at Strauss Malk & Feder LLP test provisions, states seek to balance the desire for in Chicago testamentary freedom with public policy concerns

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regarding equity and protecting the property of estates. in trusts. However, no state court or legislature to our Strict construction. As equity disfavors forfeiture, knowledge has stated that the rule applicable to wills numerous states, including California, Georgia, Illinois, wouldn’t be applicable to trusts. In fact, many states, Nevada, New York and Texas, strictly construe no-con- such as Illinois, have held trusts will be subject to test provisions.3 For instance, in Illinois, when deter- the same interpretive treatment as wills—as wills and mining the scope of a no-contest provision and whether revocable trusts are different in form, but not neces- a beneficiary’s action falls within the scope of that pro- sarily in substance.11 vision, courts require that “a reasonable interpretation Limitations to enforcement based on public poli- must be given in favor of the beneficiary.”4 Moreover, in cy. Several states, including Georgia, Illinois and New California, Nevada and New York, a no-contest clause York, have found it violates public policy to enforce a won’t be interpreted beyond that which was plainly the no-contest provision against a beneficiary who brings testator’s intent.5 As a result of strictly construing these a lawsuit regarding the eligibility or conduct of a fidu- provisions, courts frequently find a beneficiary’s actions ciary, and those states refuse to enforce a no-contest didn’t trigger a no-contest clause.6 clause in those situations. Probable cause and good faith. While states seek to effectuate a testator or settlor’s intent by enforcing a no-contest provision, states don’t want to discourage While some courts have never stated someone with a legitimate basis for challenging a will or trust from filing a lawsuit. The Uniform Probate they won’t enforce a no-contest Code (UPC) and Restatement (Third) of Property (Restatement Third) have addressed this concern by provision against a litigant who not enforcing a no-contest provision if probable cause exists to institute the proceedings.7 Twenty states, acted in good faith, it seems fairly including Arizona, Colorado, Hawaii, Michigan and Minnesota, have adopted the UPC and Restatement implicit that many courts will allow Third approach that no-contest provisions are unen- forceable when there’s probable cause or good cause to litigants to bring such an action with institute proceedings.8 The Restatement Third says that “probable cause” means: little consequence.

. . . at the time of instituting the proceeding, there was evidence that would lead a reasonable For instance, Georgia and New York courts have held person, properly informed and advised, to con- that it’s a violation of public policy to enforce a no-con- clude that there was a substantial likelihood that test provision against a beneficiary who brings litigation the challenge would be successful.9 that questions the eligibility or conduct of fiduciary.12 Similarly, in Illinois, it’s a violation of public policy to Additionally, eight states, including Connecticut, enforce a no-contest provision against a beneficiary Iowa and Texas, also require a litigant to bring a challenging the appointment of an executor.13 Courts lawsuit in good faith as well as with probable or just have emphasized that no-contest clauses can’t be used cause.10 While probable cause is a determination that a to insulate fiduciaries from exercising reasonable care.14 lawsuit was objectively reasonable, good faith focuses Generally speaking, courts don’t seem to want more on the subjective intent of the litigant. to cause a chilling effect on beneficiaries bringing The law regarding no-contest provisions in trusts litigation when a no-contest provision is included in is less established. The UPC only applies to wills, and an estate plan. While some courts have never stated the Uniform Trust Code (UTC) is silent on the issue they won’t enforce a no-contest provision against a of no-contest clauses. Moreover, many states haven’t litigant who acted in good faith, it seems fairly implicit ruled on the enforceability of no-contest provisions that many courts will allow litigants to bring such an

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action with little consequence. In Wojtalewicz’s Estate under this Agreement or any trust created v. Woitel, the beneficiary aimed to deny the appoint- hereunder shall be held by the trustee(s) of the ment of an irresponsible executor.15 In In re Estate of trust(s) being challenged, or if none, then the Mank, a guardian filed a petition to contest a will on trustee(s) of the trust(s) from which the gifts behalf of a beneficiary to toll the statute of limitations or interests would otherwise be received (col- to get the court’s approval of a settlement agreement.16 lectively, the “Defending Trustee”), without the Implicit in these holdings is the notion that the court Contestant having any right to receive distribu- is concerned about impacting the behavior of good tions, withdraw assets or exercise any lifetime faith litigants. powers of appointment (the “Withheld Funds”),

(ii) all of the costs of such defense, including Courts have expressed reluctance but not limited to attorneys’ fees, court costs, experts’ fees, trustee’s fees, expenses and any to enforce no-contest provisions other fees or expenses which would not have been incurred but for the Contest, to be deter- as equity disfavors forfeiture. mined in the sole and absolute discretion of the Defending Trustee, shall be charged to and paid from the Withheld Funds, and Alternative No-Contest Provisions Returning to our example above, Anna is concerned (iii) upon the full, final and complete resolu- about her son, David, contesting the validity of her tion of all elements of such Contest, including trust and wasting the trust’s assets in prolonged litiga- the expiration of any periods of time in which tion. Below are three alternative no-contest provisions an appeal may be filed, then any remaining that courts may be more willing to enforce, as they Withheld Funds shall pass to or in trust for avoid or reduce forfeiture, which courts seem to find the Contestant as otherwise provided in this particularly loathsome: Agreement. The Contestant shall not, at any time, be a Defending Trustee, and in the event of Litigation holdback fund. a vacancy in the position of Defending Trustee, No Contest. If any person beneficially interested a successor Defending Trustee shall be appoint- in this Agreement (the “Contestant”) shall enter ed in the same manner in which the Defending into an agreement to, commence or, except as Trustee was or could have been appointed under required by law, participate in any proceedings this Agreement, except that the Contestant shall to; (a) contest the validity of this Agreement or not participate in any such appointment. We any part thereof, (b) contest the validity of either request, but do not require, that the trustee not Grantor’s will or any part thereof, (c) assert any settle any Contest, and no court of competent claim based on an alleged agreement to make jurisdiction permit the settlement or resolu- a will or trust agreement or otherwise dispose tion of any such Contest, in a manner which of either Grantor’s estate or any part thereof, would interfere with this Agreement or either (d) request an accounting for any period prior Grantor’s estate planning generally. to the Survivor’s death, (e) contest the validity of any other trust of which a Grantor is a grantor, This clause functions differently from a typical or (f) contest any beneficiary designation for no-contest clause because a beneficiary doesn’t forfeit insurance, employee benefits, deferred compen- his interest simply by filing a will or trust contest. sation or any other asset passing to or outside Rather, the beneficiary’s interest is: (1) restricted this Agreement (each a “Contest”), then: during the contest, and (2) diluted by the cost of litiga- tion. Therefore, beneficiaries won’t forfeit their entire (i) all gifts to and interests of the Contestant interests by filing a lawsuit.

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We’re not aware of courts ruling on this type of dants shall forfeit whatever interest they would no-contest clause. Courts may be more willing to have taken under this Declaration and my estate enforce this type of provision given litigants won’t for- shall be administered and distributed as though feit their entire interest by filing a will or trust contest. such beneficiary and all of his or her descen- dants had predeceased me. Risking more than just your share—risking your child’s share. Under this provision, if a beneficiary contests the No Contest. If any person beneficially interested will or trust, the beneficiary and his descendants will in this Agreement shall enter into an agreement forfeit their share under the instrument. If this were to, commence or, except as required by law, employed in our example, if David contests the trust, participate in any proceedings to: (a) contest the not only will he forfeit his $1 million, but also his validity of this Agreement or any part thereof, daughter Kate would forfeit her $250,000. (b) contest the validity of my will or any part The enforceability of such a provision is unclear as thereof, (c) assert any claim based on an alleged most appellate courts have never ruled on this type of agreement to make a will or trust agreement or provision. However, in Tunstall v. Wells, a California otherwise dispose of my estate or any part there- appellate court found that a similar provision didn’t of, or (d) request an accounting for any period violate public policy.17 In Tunstall, a grantor included prior to my death (collectively, a “Contest”), a no-contest clause in his trust that stated if any of such beneficiary and such beneficiary’s descen- his three named daughters contested the trust, they

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RU FEATURE: ESTATE PLANNING & TAXATION

would each forfeit their shares.18 The court reasoned be terrorized into relinquishing his legacy by any threat of forfeiture. Other- this clause is no different from traditional no-contest wise, he would be forced to stand by silently while the executor jeopardizes clauses and clearly expressed the settlor’s intent.19 the assets of the estate.” Illinois courts strongly favor testamentary freedom While courts could choose not to enforce this type and will effectuate a testator or settlor’s intent so long as it doesn’t violate of no-contest provision, it may never make it to court public policy (In re Estate of Feinberg, 235 Ill.2d 256, 268 (2009)) (“the public given that parents don’t want to risk forfeiting their policy of the state of Illinois protects the ability of an individual to distribute his interests and their children’s interests. This clause property, even after his death, as he chooses, with minimal restrictions under provides an even stronger deterrent not to litigate as state law); Harris Trust & Savings Bank v. Donovan, 145 Ill.2d 166, 172 (1991); parents may risk their share but may be more reluctant Harris Trust & Savings Bank v. Beach, 118 Ill.2d 1, 3, (1987). to risk their children’s inheritances. 3. Cal. Prob. Code Section 21312; Matter of W.N. Connell and Marjorie T. Connell Living Trust, 134 Nev. 613, 617 (2018); Badouh v. Hale, 22 S.W.3d 392, 397 (Tex. Condition precedent. Courts have expressed 2000); In re Ellis, 683 N.Y.S.2d 113, 119 (1998); Linkous v. National Bank of Georgia, reluctance to enforce no-contest provisions as equity 247 Ga. 274, 274 (1981); Wojtalewicz’s Estate, supra note 2. disfavors forfeiture.20 In a traditional no-contest pro- 4. Clark v. Bentley, 398 Ill. 535, 540 (1947). vision, a beneficiary who contests a will or trust will 5. Matter of W.N. Connell, supra note 3; Perrin v. Lee, 164 Cal. App. 4th 1239, 1249 forfeit his interest in the instrument. Testators and (2008); In re Ellis, supra note 3. settlors can eliminate the risk of forfeiture by condi- 6. See, e.g., Schroeder v. Sullivan, 2018 IL App (1st) 163210, par. 51, 104 N.E.3d 460, tioning an individual’s share on not contesting a will or 473, as modified on denial of reh’g (June 1, 2018). trust. For instance, in this example, Anna could state 7. Uniform Probate Code Section 2-517; Restatement (Third) of Property (Wills & that David will receive $1 million if he doesn’t contest Don. Trans.) (Restatement Third) Section 8.5 (2003). her will or trust for two years after her death. 8. Alas. Stat. Section 13.16.555; Ariz. Rev. Stat. Section 14-2517; Colo. Rev. Stat. The foregoing alternative functions similar to a Section 15-11-517; Haw. Rev. Stat. Section 560:2-517; Idaho Code Section 15-3- traditional, forfeiture-like no-contest clause. David 905; Ind. Code Ann. Section 29-1-6-2; Me. Rev. Stat. tit. 18-C, Section 2-516; Md. won’t receive money if he contests Anna’s will or trust, Est. & Tr. Code Section 4-413; Mich. Comp. Laws Section 700.2518; Minn. Stat. and this deters him from filing a lawsuit. Courts may Section 524.2-517; Mont. Code Section 72-2-537; Neb. Rev. St. Section 30-24,103; N.J. Stat. be more willing to enforce this condition precedent as Section 3B:3-47; N.M. Stat. Section 45-2-517; N.D. Code Section 30.1-20-05; 20 there’s arguably less of a concern over forfeiture. Then Pa. Con. Stat. Section 2521; S.C. Code Section 62-3-905; S.D. Codified Laws again, courts may also find this clause violates public Sections 29A-2-517 and 29A-3-905; Utah Code Section 75-3-905; In re Estate of policy because it chills litigation. Foster, 190 Kan. 498, 500 (1962). 9. Restatement (Third) supra note 7. Endnotes 10. Tex. Est. Code Ann. Section 254.005; Winningham v. Winningham, 966 S.W.2d 1. Florida is the only state that expressly prohibits the enforcement of no-contest 48 (Tenn. 1998); Matter of Estate of Westfahl, 1983 OK 119, (1983); Estate of Kubick provisions. Fla. Stat. Ann. Section 732.517. v. Potter, 9 Wash. App. 413, (Wash. App. Div. 2, 1973); Ryan v. Wachovia Bank 2. Wojtalewicz’s Estate v. Woitel, 93 Ill.App.3d 1061, 1063 (1st Dist. 1981). In Wojtale- & Trust Co., 235 N.C. 585, (1952); Cocklin’s Estate v. Watkins, 236 Iowa 98 (1945); wicz, a beneficiary under the decedent’s will, which contained a no-contest Dutterer v. Logan, 103 W.Va. 216 (1927); South Norwalk Trust Co. v. St. John, 92 provision, filed a petition to deny the appointment of the named executor in Conn. 168, 101 (Conn. 1917). the will. The named executor timely failed to admit the will to probate, failed 11. Handelsman v. Handelsman, 366 Ill.App.3d 1122, 1129 (2d Dist. 2006). to file estate tax returns and caused the estate to incur substantial penalties. 12. Duncan v. Rawls, 345 Ga.App. 345, 351 (2018); In re Estate of Prevratil, 121 A.D.3d The appellate court held the beneficiary’s petition to deny the appointment 137, 148 (2018). of the executor fell within the scope of the no-contest clause, but declined to 13. Wojtalewicz’s Estate, supra note 2. enforce the clause as it believed it would violate public policy. The Wojtale- 14. In re Estate of Prevratil, supra note 12; Wojtalewicz’s Estate, ibid. wicz court reasoned that the beneficiary had a statutory right to challenge 15. Wojtalewicz’s Estate, ibid. the appointment of an executor who failed to admit the will to probate within 16. In re Estate of Mank, 298 Ill.App.3d 821, 827 (1st Dist. 1998). 30 days after learning he’d been named executor. Further, the court high- 17. Tunstall v. Wells, 144 Cal. App. 4th 554, 570 (2006). lighted enforcement of the no-contest clause would endanger the assets of 18. Ibid., at p. 558. the estate as it would inhibit beneficiaries from protecting the estate against 19. Ibid., at pp. 563-570. waste. The court emphasized “the petitioner, a legatee under the will, cannot 20. See supra note 3.

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